The forecast for the global reinsurance market for 2025 is positive
The growth of profits of global reinsurers, which will be stable in the short and medium term, was the main reason for AM Best’s positive forecast for the global reinsurance market.
However, analysts remain concerned about the effectiveness of existing catastrophe loss reserves, especially for the natural disaster years 2016 to 2019, as well as volatility due to climate risks and the economic and geopolitical environment.
AM Best described the conditions that led the rating agency to change its reinsurance market outlook from stable to positive, the first-ever outlook upgrade for the market.
The global reinsurance market delivered strong results in the first half of 2024, with further improvements in underwriting profitability, ROE and continued reinsurer capital build-up. Income sustainability has been further enhanced by higher underlying return on capital, which provides reinsurers with an additional buffer to cover losses.
Over the past year, reinsurers have seen rates return to levels not seen since 2006. At the same time, interest rates have recovered somewhat from historic lows, said Carlos Wong-Fupui, senior director of global reinsurance ratings at AM Best. These conditions allowed the reinsurance market to stabilize.
Positive prospects of the reinsurance market
The positive outlook for the reinsurance market stems from a reduction in risks, as well as an increase in reinsurance rates with changes in terms and limits of coverage — factors that are as important as price increases, making margins stable in the short to medium term.
Despite the improved conditions, the reinsurance market lacked new entrants, which indicates a more disciplined approach on the part of investors. Although the capital is there, it has become more efficient.
There is a growing demand for more complex and new risks, such as cyber risks and artificial intelligence. Increased demand for complex risks has pushed reinsurers away from exposures such as secondary risk reinsurance or income statement protection.
The strategic reset of the reinsurance market by global reinsurers has led to high technical returns and changed the dynamics of the industry.
New reinsurers focus on complex risks
There has been a shift in the focus of reinsurers to complex risks such as cyber risks and new technologies and away from more volatile, frequent losses. Interest rates are starting to fall again this year, and that could herald an easing of monetary policy, which could mean excess capital, lower rates and more competition for the reinsurance market. That’s potentially not good for the industry, analysts say.
Geopolitically, global tensions are not abating, and this year’s US elections may have an impact. The increase in the underlying underwriting margin is due to a significant improvement in the underlying combined ratio. The underlying underwriting margin increased from 2.7% a year ago to 3.9%.
Mid-year reinsurance contract renewals further cemented positive market trends, setting the stage for a more competitive reinsurance market in 2025.
Reinsurers’ price-to-book value is at a peak, prompting speculation about M&A activity.
Trends in reinsurance against accidents and the development of reserves
AM Best monitors trends in casualty and property reinsurance, particularly in the US.
Property casualty reinsurance rate increases are likely to slow to below 10% on average when reinsurance contracts are renewed in January 2025. Therefore, the improvement in underwriting margin will be less significant than in 2023.
Given the comprehensive de-risking measures and reallocation of interests between reinsurers and insurers, as well as the absence of new players in the market, AM Best expects tight pricing conditions to last longer than in previous cycles.
Non-life alternative capital grew by $6 billion (+5.6%) to $113 billion on higher earnings and capital inflows, particularly in the form of catastrophe bonds.
Reinsurance operating results were strong in 2023 and will remain so in 2024. Companies made enough profit to cover their cost of capital last year and this year.
How did the adoption of IFRS 17 affect the reinsurance industry?
At the same time, IFRS 17, which came into effect on January 1, 2023, has been adopted by many reinsurers, a move that has created problems for users of the new financial standard as they adapt to its provisions. This change also prompted AM Best to change its list of largest reinsurers depending on the reporting standard used.
The difference between premiums under the old standard and reinsurance income under IFRS 17 does not allow for direct is a comparison. Combined reinsurance ratios are slightly different, with IFRS 17 discounted combined loss ratios.
The requirements of IFRS 17 can lead to accounting discrepancies and volatility in P&L — a direct consequence of an insurer’s reinsurance management strategy and contracts entered into today.
IFRS 17 is the latest IFRS standard for insurance contracts, which replaced IFRS 4 from 2022. It specifies which insurance contract items should appear on an insurance company’s balance sheet and income statement, how to value these items, and how to report and disclose this information.
Prospects for the development of the life reinsurance market
Life reinsurance has grown rapidly, with four or five major players dominating the life reinsurance market. Several new reinsurers were established in offshore companies.
New private equity-backed insurance companies have been created, along with asset managers who earn commissions for managing assets by moving them to their offshore reinsurance subsidiaries.
More private assets are moving into insurance and reinsurance, making valuations more difficult for analysts and liquidity checks more important. European life reinsurance companies improved their performance in 2023-2024, benefiting from a decline in mortality related to COVID-19.